First Impression of USD Flows

One of the things I want to implement in my life is not to be swept away by emotions and intelligently rationalize. Rather, I want to see reality for what it is. Never more than a first impression - wise words of Marcus Aurelius.

On that thread, I will attempt to see the world for what it really is; not more than a first impression, when it comes to USD flows, and extrapolate on what it means for the US.

Current USD Overvaluation

When assessing the US fiscal situation, it can be tempting to simply think of the dollar-denominated proportions between debt, interest, revenue, and spending, at current dollar valuations. Then, the problem seems simple - get spending below income to begin to tread water! You have an income, you can start paying off debt, dealing with USD and Treasury dumping... anything is possible once you have an income.

But really, the issue with that is imagining some kind of homeostasis at current dollar valuations. Really, the dollar is overvalued with a fat monetary premium due to its de facto use as money along with Treasuries in large swaths of the world.

What happens when countries no longer wish to accept dollars for their goods or accumulate Treasuries as savings? Then, the US must acquire forex to actually pay for trade deficits. Which brings another factor into the equation. The US has approximately 65b per month, which is 780b annualized, of trade deficits. However, currently these trade deficits don't cause inflation because foreigners simply accept and keep dollars and Treasuries as savings and money.

Another important point is that US fiscal obligations shouldn't be measured in dollars, but rather, in goods and services. US obligations are really forex (metaphorically including, say, oil and food as forex) obligations to foreigners and constituents. The US has to import goods as part of its trade deficit, provide medical services, food, and shelter as welfare, and pay its soldiers in goods and services.

With this more accurate mental model, we can consider what happens when the dollar devalues relative to goods and services, and incomes (including the government income) don't go up proportionally (Dollar devaluation could happen as a result of money creation, falling productivity, and shrinking dollar jurisdiction). When the dollar devalues and incomes don't go up proportionally, spending must fall. This could come in the form of nominal spending not keeping up with inflation, or continued currency devaluation via money printing, which achieves the same thing. Either way, the US fails to be able to pay its obligations measured in goods and services, and the system becomes weaker and weaker as it continues to default.

All this doesn't need to result in hyperinflation, unless the money keeps getting printed and elevated levels of spending are attempted to be maintained. In Weimar Germany, money kept being printed to meet hard forex obligations. In the case of the US, we could see a large crash but eventually reach some sort of equilibrium, much like the British pound, albeit in a smaller currency jurisdiction with lower levels of spending. In such a case we would see high inflation but not hyperinflation unless the elites keep looting and mismanaging the system.

Detailed Number Crunching

With this nuanced view, the next question becomes, how far left do we have to fall? And this requires a more detailed analysis of flows.

With:

The supply-demand situation for the US dollar becomes extremely negative in terms of flows. Who wants to accumulate dollars and Treasuries as the US empire falls in a frenzy of money printing? Like all complex systems, I don't think anyone can say for certain how things will play out, but at the very least it seems the direction we are headed is down.

Okay, but the US can just reduce spending right? Right? Well, take a look at the proportions between income and spending today in this simplified approximate model:

To even begin to create a positive income and turn the situation around at current valuations, the US needs to spend 2 trillion less dollars per year. And that's just to go from deficit spending to having an income. Then it has a fat 34t pile of debt it needs to pay back with that positive income. 2t is a huge deficit - it needs to stop paying 50% of it's welfare, or its entire military and 33% of welfare, etc, any combination of which would mean a massive reduction of the system. Additionally this is all at current dollar valuations - debt and interest are dollar denominated, but military and welfare are forex denominated obligations because soldiers and constituents are paid in goods and services, not dollars. Finally, the interest payments will continue to increase because we only recently raised interest rates - either rates stay high and the interest payments will continue to balloon, or rates will go lower, reducing interest payments and inflating away debt but stoking inflation and worsening forex obligations. When combined with the aforementioned USD flows, it's clear that, barring extreme measures such as revolution or war, there's no way out; the current situation cannot be maintained.

We are just in the early stages, measured in not log but linear scale, of dollar devaluation. Anecdotally inflation is higher but still manageable. There are still profit margins to cut into before businesses close up and stop producing things as demand dries up and people become poor. The shitshow will absolutely get much wowrse.

Visualizing a Weak Dollar Society

What are the butterfly effects of a devaluing dollar? Chiefly, everyone becomes poor, and everything else springs from that.

As people become poor, the system won't have the demand to fund the same amount of production, or products will still be produced but they will be produced cheaply, paying low wages to their workers, and sold cheaply for smaller profit margins.

Real profit margins of companies will go down and employees will be paid less and less. Much like so called third-world countries, people will have to work just as hard but for less pay.

But it's not just the people that will become poor - the government will become poor, since the government's income is derived from the people. The US government won't be able to pay out so many goods and services as welfare and to its vast military. The country as a whole won't be able to afford so many imports.

Ultimately, the standard of living of US citizens will go down.

Ending the Downtrend

Eventually, as the people and the government become more poor, the government will be forced to spend less and import less unless it continues printing into hyperinflation.

As the currency devalues, exports will become competitive. The US won't eat all its food but export more and more. Its Apple employees won't get paid so much but other countries will enjoy importing Apple phones produced for cheaper labor and sold at cheaper prices. America will build a trade surplus, and as a nation finally have an income instead of having trade deficits funded with debt.

One thorn in this scenario is that this dynamic of cheaper exports only happens when US currency devalues not just in real terms but in comparison to other countries' similarly depreciating fiat currencies. Remember that normies in other countries are also becoming impoverished since they have fiat currencies which are mostly managed even worse than the dollar and, just like American citizens, are paying 90% tax rates over long timeframes.

The USD must devalue a lot to become cheaper to people with even shittier forex. The masses are impoverished from cantillionaire money printing, the nations are impoverished from mismanagement of their economies, and in order for the US to become export competitive, it'll have to outpace other fiat currencies in their mismanaged currency devaluations.

The Ultimate Fate of the Dollar

The ultimate fate of the dollar is just another shitty fiat currency. Westerners think of the dollar as money and like to measure the world in it. But would we ever measure our trade deficits and national income in Argentinian pesos or Zimbabwe dollars? Absolutely not.

But in the future, for most of the world - pretty much anyone who's not a US citizen - measuring anything in US dollars will become, qualitatively, just as ridiculous as measuring anything in Zimbabwe dollars.

Wen Crash?

It will take time. We are just in the beginning stages. It could take a decade to play out, or even more. Particularly, dedollarization is gaining some steam but I don't see it happening in Western European countries nor in Latin America, at least not yet. Dollar dominance and dogshit fiat currency in Latin America is still going strong. The American empire has a lot of buffer room.

Of course, the current American state might not be in one piece by the end of it all. That would make the dollar crisis even worse, and make its eventual jurisdiction even smaller. Let's see how it turns out.

What I do believe is that eventually, the American homeland, with its great natural resources, land, and people, will make it out a new country, by the people and for the people, with hardworking constituents, high productivity, and excellent finances. It's simply that there may be a painful transition period in between.